Companies expect overall office space demand to decrease as technology brings in better utilisation of space and reduction in headcount, according to a survey by a leading commercial property consultant. However, they see demand for high quality office space to increase in the near future.

Technology is enabling a more mobile workforce and requiring companies to build more agility into their headcount planning. As better space utilization, and weaker front and back office headcount growth will reduce overall demand for office space, landlords must act now to ensure they remain competitive.

Real Estate Developers are, however, more confident about the outlook for office space demand, as they anticipate stronger aggregate demand driven by new startups and emerging industries.

Companies across the Asia Pacific region are placing employee experience at the center of major real estate decisions due to advances in technology, rather than relying on just good location, according to the survey.

According to the survey, whilst location would remain important, the changing order of real estate would require buildings and work spaces to be far more flexible and adaptable than before.

According to the report, it is expected that the headcounts in the information technology space would increase and more multinationals are likely use co-working spaces and incubation centers to improve their access to IT talent and innovative ideas.

Would this increase the value of the commercial properties? Would more developers opt for leasing rather than selling?

Real Estate developers building commercial properties, including office blocks and retail malls, are increasingly looking to lease their properties than selling them on outright basis or monetising them through lease rental discounting (LRDs), given the imminent opening up of REIT market in India.

The possibility of better valuation and control through this new option of liquidating their commercial assets is holding back even developers, which have so far stuck to the strategy of either complete or strata monetisation, from selling properties on an outright basis. The office market has been growing steadily since the past few years and we expect the trend to continue. In such times, rental yielding asset owners might want to hold their properties and enjoy better valuations and also list them through REIT rather than monetise them at a go.

However, the launch of the first REIT seems to be at least 2-3 quarters away and the success of initial REITs will decide the fate of this market in India. Realty developers who also used lease rental discounting to monetise their commercial assets along with outright model are now keen to create a portfolio that can be listed under a REIT.

The entire project, including retail and some residential component, is estimated to be completed in the next two years.

Some builders that used to sell offices on outright basis earlier have trimmed their portfolio that is being sold now on expectations of better valuation through REITs later.

In the backdrop of an ongoing transformation in business environment, Indian real estate, especially commercial real estate, is witnessing a robust rise in investment inflow as both foreign and domestic institutional investors are infusing more funds into the sector. Large global institutional investors, including Blackstone Group, Brookfield Asset Management, GIC, Canada Pension Plan Investment Board (CPPIB), Goldman Sachs and Qatar Investment Authority, have already been investing aggressively in this segment over the past few years.

Listing of leased commercial realty portfolios under the real estate investment trusts would provide the liquidity option to these investors in the future.

In addition to this, more funds are eyeing investment and alliance opportunities in the backdrop of recent policy reforms.

While these entities had earlier shown interest in investing in commercial real estate, are they also looking at other realty segments such as residential, retail and hospitality?

A recent research report of one of the leading real estate research firms has revealed that the rental growth in several micromarkets across India, particularly in cities like Bengaluru, Pune and Gurgaon continued to surge during the quarter ended September. Bengaluru office property market continued to outperform other markets with 10 million sq ft absorption recorded in the first nine months of 2017. Shrinking vacancy levels built the upward pressure on rental in several micro-markets of Bengaluru. Although rental values in Pune stabilised in the second and third quarter, they are still relatively higher than the same period last year due to constant supply crunch in Pune market. In the last few quarters, due to availability of quality Grade A supply and necessary infrastructure, several Gurgaon micromarkets have also emerged as a bright spot in the National Capital Region market, thus leading to year-on-year rental growth.
The report further revealed that all the south cities and Pune market are witnessing single digit vacancy rates. While the construction of grade A commercial properties may ease some of the pressures, we do not expect inventory pressure to reverse any time soon. Despite a strong supply pipeline in most of these cities, we expect, the rental values to increase in the short term, especially, in grade A developments. In Bengaluru, due to its strategic location, proximity to prime residential areas and limited supply, CBD areas like MG Road, Vittal Mallaya Road continue to reign as preferred micromarkets among occupiers, thus recording an on-year rental growth of 16.7%, the maximum among all city micromarkets. During the quarter, Outer Ring Road (ORR) remained the preferred location with major contribution of 74% in the total absorption. Although the future supply pipeline in this micromarket is likely to complement demand, it is the most sought after location in Bengaluru. Owing to the same, rental values inched up by 7.1%, the report added. In Gurgaon, around 30% of the total leasing volume was concentrated on the Golf Course Road during the quarter. The location remained a preferred choice for premium occupiers, especially due to its enhanced metro connectivity, thus leading to 14.8% on-year rental growth. As an established IT hub in Gurgaon, Cyber City has continued to draw tenants due to its locational advantages along with presence of premium buildings and good infrastructure. Continued occupier preference and low vacancy rates in this micromarket pushed the average rents by 9.5% on y-o-y basis.
The IT-ITeS destination of Chennai, the OMR Pre-Toll micromarket, comprising Taramani, MGR Salai, Kandanchavadi, Perungudi locations witnessed rental growth of 11% y-o-y. Despite continuous upward pressure on rents and low vacancy, the micromarket maintains its preference among occupiers with 51% share of total absorption during the quarter. The office market performance in Hyderabad continues to be intense in the Secondary Business District (SBD) and about 80% of the total leasing volume during the quarter is concentrated in this micromarket. Being the preferred micromarket in Hyderabad, SBD witnessed about 8% y-o-y increase in rentals. Would Indian cities pick up on the next few quarters?

According to the recent research report of a leading real estate advisory firm, the office leasing across top 9 cities in the country had dropped marginally to 1% year – on – year at 10 million square feet in the Q3 of the current financial year. According to the Report, however the sales may pick up in the Q4. The total office space absorption in the Q3 of the year 2017 was around 28.9 million, wherein Bangalore registered office leasing grabbing a 31% share of the overall demand, followed by the National Capital Region (NCR) with a 25% share, Hyderabad and Chennai with 12% each, Mumbai with 10%, Pune with 8% and Kolkata grabbing a 2% share. According to the report, with the 8% share of total leasing volume in the Q3, co-working operators are making their presence felt in the market and the overall commercial market would remain stable despite the economic slowdown and increasing concern about the disruption from the artificial intelligence, automation and stringent data security laws. According to the Report, around 90 million sq ft of office space is under various stages of construction at present, which would likely increase the current total stock by 16% in the next three years. The report has also suggested that office rents are likely to see an upward growth trajectory specially in grade A buildings with an average annual increase of 4-5% over the next three years likely in India across cities. Would we see an increase in the co – working space particularly the major cities in the country?